26 May 2016 Global Tax Alert Indian Tax Administration issues draft indirect transfer rules EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary India s Central Board of Direct Taxes (CBDT) has issued draft rules (Draft Rules) and forms relating to indirect transfer (IDT) provisions under Indian Tax Laws (ITL). The Draft Rules provide valuation methodology, determination of proportionate income, and reporting and document retention requirements related to the IDT. Public comments and suggestions are due by 29 May 2016. Detailed discussion Background The ITL was amended by the Finance Act (FA) 2012 1 to tax gains arising from a transfer of a share or interest in a foreign entity (FE) that derives, directly or indirectly, its value substantially from assets located in India. The FA 2015 2 has clarified that an entity will be deemed to derive its value substantially from assets located in India if the value of Indian assets: (a) exceeds INR100 million (approx. US$1.67 million); and (b) the value represents at least 50% of the value of all assets owned by the FE. FA 2015 also addressed other matters such as taxation on proportionate basis and reporting obligations but detailed guidelines were pending.
2 Global Tax Alert The Draft Rules provide: Valuation standards in determining the 50% substantial test Determination of proportionate income attributable to Indian assets Details of information reporting and retention of documents Determination of fair market value (FMV) of assets Different methods are provided when computing the FMV of tangible and intangible assets, depending on the type of shares/interest held, directly or indirectly, by the FE: Shares of a listed Indian company (without right of management or control by the FE) Observable Price (OP). 3 Where the shares are listed on more than one recognized stock exchange, the price of the shares is to be computed with reference to the recognized stock exchange which records the highest volume of trading in the shares during the period which is considered for determining the price. Shares of a listed Indian company (with any right of management or control) Market capitalization based on the OP, increased by the book value of liabilities 4 of the Indian company as on the SD, divided by the total number of outstanding shares. Unlisted shares of an Indian company/shares of an Indian company not listed on a recognized stock exchange FMV on gross assets on the SD determined by a merchant banker or an accountant, in accordance with any internationally accepted pricing methodology. Interest in a partnership firm, a limited liability partnership or an association of persons Proportionate enterprise value on the SD (based on gross assets), as determined by a merchant banker 5 or an accountant, in accordance with internationally accepted pricing methodology. Other Assets Estimated price that would be achieved if the asset is sold in the open market on the SD increased by book value of liabilities considered for determining FMV, based on a valuation by a merchant banker or an accountant. The FMV of all assets of the FE should be computed in the following manner: Transfer between unrelated parties where consideration is determined on the basis of a valuation report Gross asset value as determined by a report of an accountant or merchant banker of international reputation. In any other case Listed shares of the FE Market capitalization based on OP increased by book value of liabilities on the SD. Unlisted shares of FE Value of the FE and its subsidiaries on a consolidated basis as determined by a report of a merchant banker or accountant pursuant to internationally accepted methodology (based on gross assets). Determination of income attributable to assets in India Under the IDT provisions, only the income of a nonresident transferor which is reasonably attributable to the assets located in India is taxable in India. Pursuant to the Draft Rules, reasonably attributable income is the proportionate amount of such income from a transfer of shares or interest in the FE held by the transferor, computed in the following formula: A*B/C, where, A Income from the transfer of the share or interest in the FE, as if such share or interest is located in India B FMV of assets located in India as on the SD C FMV of all assets of the FE as on the SD The transferor is required to furnish an audit report, providing the basis of apportionment of income. Failure to furnish the necessary information results in the entire income being subject to Indian tax in India under the ITL. Information reporting and document retention requirements Under the ITL, every Indian entity through or in which the FE derives substantial value is required to furnish certain information to the Indian tax authority within the specified timelines: For a transfer that has effect in, directly or indirectly, transferring management or control in relation to Indian entity 30 days from the date of transfer All other cases 90 days from the end of the financial year in which the transfer takes place Failure to provide such information could result in penalty assessments. The Draft Rules require the Indian entity to electronically provide the following information, including but not limited to: Name, address, residential status, permanent account number, details of immediate, intermediate as well as ultimate holding entity, etc.
Global Tax Alert 3 Details of the transactions, including consideration for such transaction, details of transferor/transferee Basis of determining the location of share or interest being transferred Details of the value of Indian assets and global assets of the FE Details of share/interest transferred during the 12 months preceding the date of transfer along with details of reporting compliance or reasons for non-compliance It is also proposed that the Indian entity should retain the above documents and certain additional information/ documentation for eight years from the end of the financial year in which the IDT is triggered. Implications The draft valuation rules referring to internationally accepted valuation standards at the entity level is a welcome move. The simplicity and consistency in the valuation rules can potentially lower litigation in India. However, to verify the proportionate taxable income in India, the Draft Rules also require an audit report to be furnished by the transferor as well as complying with the reporting and document retention requirements. The IDT provisions are already effective (as of 1 April 2015); however once the Draft Rules are finalized, the date of applicability of the rules and their impact on past transactions would need to be re-evaluated. Endnotes 1. See EY International Tax Alert, India s Union Budget 2012-13, dated 21 March 2012. 2. See EY Global Tax Alert, India releases Budget 2015, dated 5 March 2015. 3. Higher of: (i) average weekly high and low closing prices of the shares quoted on the stock exchange during the six-month period preceding the specified date (SD); or (ii) average weekly high and low closing price of the shares quoted on the stock exchange during the two weeks preceding the SD. 4. Book value of liabilities means value shown in the Balance Sheet excluding paid up capital of equity share or member s interest. 5. A merchant banker means Category I merchant banker registered with the Securities and Exchange Board of India, as understood under the provisions of the ITL.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), Mumbai Sudhir Kapadia +91 22 6192 0900 sudhir.kapadia@in.ey.com Ernst & Young LLP (India), Hyderabad Jayesh Sanghvi +91 40 6736 2078 jayesh.sanghvi@in.ey.com Ernst & Young LLP Indian Tax Desk, New York Riad Joseph +1 212 773 4496 riad.joseph1@ey.com Amit Gouri +1 212 773 7096 amit.gouri1@ey.com Sameep Uchil +1 212 773 4862 sameep.uchil@ey.com Ernst & Young LLP Indian Tax Desk, San Jose Neeraj Khubchandani +1 408 947 5600 neeraj.khubchandani@ey.com Ernst & Young LLP Indian Tax Desk, Chicago Romit Patel +1 312 879 2526 romit.patel1@ey.com Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty +1 212 773 7479 chris.finnerty@ey.com Kaz Parsch +1 212 773 7201 kazuyo.parsch@ey.com Bee Khun Yap +1 212 773 1816 bee-khun.yap@ey.com Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Martin +1 713 751 5775 trang.martin@ey.com
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